To refinance a business loan, you must replace the existing loan with a new one. This requires you to have an understanding of how much you need to satisfy the existing loan, identify the best type of loan to suit your needs, and then find a lender willing to issue you funding. While there may be some variations involved with refinancing a small business loan, here are the steps I recommend taking to have the best outcome possible.
Step 1: Understand Your End Goal
There are many reasons to refinance business debt, and your specific reasons can affect the best steps for you to take later on in the refinance process such as the type of loan or lender you choose. Even if you know why you want to refinance, below are some additional benefits you could consider:
- Lower your payments: To help with cash flow purposes or allow you to save more money, refinancing can lower your payments. This can be done through a combination of choosing a lower loan amount, lower interest rate, or longer payment term.
- Reduce your interest rate: Lowering your interest rate can save you money on interest charges over the life of the loan. It can also help lower your total monthly payment depending on the other loan terms you choose, such as the payment period of the new loan or loan amount.
- Change the length of your loan: If you leave the other terms of your loan unchanged, selecting a longer loan term can help lower your monthly payments, although it might result in more total interest charges being paid over the long term. Conversely, shortening the length of the new loan can help you save on interest charges over the life of the loan.
- Switch from a variable to fixed rate: Variable rate loans typically have more competitive interest rates, but the tradeoff is that payments can fluctuate, which can make it difficult to plan for from a cash flow perspective. Meanwhile, fixed-rate loans give you the stability of payments that will not change, although interest rates are typically higher. For details, see our fixed vs variable rate comparison.
- Remove a cosigner or other individual: If an individual no longer wants to be legally liable for the debt payments, such as a cosigner or guarantor, they’ll need to be removed from the loan. This is typically only possible by completing a refinance.
- Consolidate debt: If you get a new loan amount larger than what’s needed to pay off your existing loan, the excess proceeds can be used to pay off other debt as well.
Step 2: Obtain a Payoff Demand
Although this is a step that you may not have to take, I highly recommend it because it can help you spot issues such as unexpected fees. Ordering a payoff demand from your current lender allows you to see the amount needed to satisfy the loan in full. Payoff demands will show you the principal balance, interest charges based on an estimated payoff date, and any outstanding fees or penalties.
Here are some items I recommend paying close attention to when reviewing your payoff demand:
- Principal balance: Ensure that the principal balance matches what you see in your online account. In some cases, payments made recently may still show as pending and might not be accounted for on a payoff demand.
- Payoff date: This is the date that the payoff is expected to occur and determines the number of days of interest that will apply. For this step, it’s normal for the date to be your best educated guess. I recommend getting a payoff good for at least 30 days.
- Interest charges: This is the amount of interest charges that will need to be paid. This can fluctuate based on your estimated payoff date.
- Fees: This can include any outstanding fees such as late fees or prepayment penalties.
- Total payoff amount: The total payoff amount is typically the sum of your principal balance, interest charges, and any outstanding fees or penalties.
Step 3: Review New Loan Options
To complete a small business loan refinance, you’ll need to choose a new loan to replace your existing one. Many different types of loans are available, each with pros and cons.
Specialized Loans
Specialized loans often have restrictions as to how you can use the funds. A common example is an equipment loan, where loan proceeds may only be used to finance business-related equipment. The upside here, however, is the fact that you can typically get better loan terms, including a more competitive interest rate.
General-purpose Loans
General-purpose loans typically have little or no restrictions on how funds can be used. Examples can include things like business lines of credit, business term loans, and personal loans for business uses such as home equity loans.
- Small business line of credit: This allows you to draw funds on an as-needed basis up to your credit limit. Many of the best small business credit lines have repayment terms of up to 36 months.
- Business term loan: Here, you’ll get a lump sum of funds issued all at once, with repayment terms of up to 10 years or more. Many term loans can also be used for everyday expenses, like working capital. For options, see the leading working capital loans.
- Personal loan for business use: Personal loans can be a good option if your company’s credit or finances do not meet the qualification requirements for a small business loan. Many of the top personal loans for business funding have fast funding speeds and flexible credit requirements.
Step 4: Shop Lenders
Once you’ve settled on a type of loan suited to your needs, you’ll need to find a provider. I recommend getting quotes from multiple lenders as it can help you get the best program, rates, and terms available for your circumstances. You can consider banks, credit unions, online lenders, and business loan brokers.
Some may require you to submit a formal loan application to give you a quote. I recommend that you ask if a hard or soft credit pull will be performed, as the latter will not impact your credit score.
How to Choose a Lender
Not every provider is perfect, so you’ll want to think about what’s most important to you and what you want to prioritize when it comes to a lender. The following is a list of qualities I strongly recommend considering:
- Loan programs offered
- Rates, fees, and loan terms offered
- Promotional rates or other incentives for new customers
- Typical loan approval and funding speeds
- Flexibility of loan eligibility criteria
- Complementary business products and services offered
- Branch locations and hours of operations
- Customer service hours of operation
- Customer reviews and ratings
If you’re unsure where to start looking for a lender, consider a business loan broker like Lendio. It has a network of over 75 different lenders and gives you the opportunity to work directly with a loan specialist who can help you choose the right provider and loan program for your circumstances.
Step 5: Apply & Provide Required Documentation
When you’ve decided on which provider you’ll use to get a small business loan, you’ll need to submit a formal loan application if you haven’t done so as part of the initial rate shopping process. You’ll then be asked to provide documentation to allow the lender to verify your eligibility.
The items below are commonly reviewed to ensure you meet a provider’s business loan requirements:
- Credit report: Your credit report reveals how you’ve handled debt payments in the past and the amount of debt you currently have.
- Credit score: Your credit score reflects how likely you are to continue making payments on time. Borrowers with a bad credit score may find it more difficult to get approved and may not be qualified for a lender’s best-advertised rates.
- Financial statements: Tax returns, bank statements, profit and loss statements, and other financial statements can be reviewed to determine your ability to repay debt based on the income being earned. Revenue trends, as well as the amount of assets you have in your business bank accounts, may also be evaluated.
- Insurance: Depending on the industry you operate in, you may need to provide proof of sufficient liability insurance.
- Legal documents: This can include documentation confirming the company ownership, proof of required business or professional licenses, or other paperwork showing your company is properly registered to conduct business.
Step 6: Review the Lender’s Decision & Loan Offer
Once the lender has reviewed all documentation needed for your loan application, it will render one of several decisions. It can either approve, conditionally approve, counter-offer, suspend, or deny your application. This will be accompanied by an overview of the rates and terms it’s able to offer to you.
If you agree with the lender’s decision and are agreeable with the loan terms, you’ll need to formally accept it in order to move on to the next step. If you don’t agree with the lender’s decision, you can ask for an explanation of how it reached that decision. Although uncommon, lenders may sometimes overlook items or make mistakes when evaluating your company’s credit, finances, and other components of your loan application.
- Approval: This is the best possible outcome as it means your loan has been approved at the terms you’ve requested and no additional paperwork is required.
- Conditional approval: Receiving conditional approval is a good sign. It usually means that your lender can issue an approval but just needs clarification on some minor items. Receiving a conditional approval usually means you’ll have to provide the provider with some additional documentation.
- Counter-offer: In many cases, a lender will issue a counter-offer if it can issue you financing—just not based on the terms you’ve initially requested. This can commonly take the form of a different loan amount or repayment term or carry the requirement to pay off certain debts to qualify.
- Suspense: A loan that is suspended typically means that there is not enough information to make a loan determination. This often occurs if the loan application is incomplete or if it is otherwise unclear what the purpose of the loan is.
- Denial: This will be issued if the provider has determined that it cannot offer any form of financing. If this occurs, the lender should provide an explanation as to why you’re ineligible.
Step 7: Sign Loan Documents & Verify Loan Payoff
Once you’ve accepted the provider’s offer, you’ll usually need to sign a set of final loan documents indicating your agreement to the rates and terms being offered. These documents will then be reviewed by the lender before loan proceeds are disbursed. Once that happens, you should verify that the old loan reflects the payoff and a $0 balance.
In reviewing the final loan paperwork, I recommend that you double-check the following items:
- Loan amount
- Interest rate
- Payment due dates, amounts, and frequency (including whether payments can change over time)
- Repayment term
- Fee schedule (such as early closure fees or prepayment penalties)
- Allowable uses of funds
Frequently Asked Questions (FAQs)
Most business loans can be refinanced. Loans where funds are used for business purposes are generally classified as business loans. Common examples include working capital loans, equipment loans, term loans, and credit lines. Unless specifically prohibited in the loan agreement, you can refinance these loans by getting a new loan to pay off the existing loan.
It depends on the type of loan you’re getting and the type of loan being paid off. In general, it can take between three and seven days. However, certain types of loans, such as SBA or other government-backed loans, have an approval and funding process that can take several months.
It’s recommended to have a credit score of at least 650 and higher. While there are lenders that have lower credit score requirements, it’s typically easier to get approved with a higher score. This can also allow you to get better rates and terms.
Bottom Line
Refinancing a business loan can provide a lot of benefits. You can save on interest charges, lower your monthly payments, simplify your finances by consolidating debt, and more. By following the steps outlined in this guide, you’ll be able to make the best decision at each stage of the refinance process, improve your approval odds, and enjoy the benefits of refinancing sooner rather than later.
